Missing the Point 101
about a new initiative at DARPA, The Policy Analysis Market (PAM), completely misses the point (with help from DARPA).
PAM is a joint venture between DARPA; the Economist Intelligence Unit, the business information arm of The Economist Group, publisher of The Economist; and Net Exchange, which is responsible for design, development and operation of the PAM trading system.
PAM and the FutureMAP program would work much like other financial markets, with investors buying "futures" in events they think are likely to happen, and selling off futures as they believe events become less likely to happen. Some of the possibilities the PAM website offers for sale are the overthrow of the King of Jordan, the assassination of Yasser Arafat, and a missile attack by North Korea.
Bidders would profit if the events for which they hold futures -- including government coups, assassinations and missile attacks -- occur.
Of course, put this way, the obvious response is:
"This is an appalling waste of taxpayers' money," Dorgan said at a Monday afternoon press conference. "We need to focus our resources on responsible intelligence gathering, on real terrorist threats. Spending millions of dollars on some kind of fantasy league terror game is absurd and, frankly, ought to make every American angry. What on Earth were they thinking?"
But, DARPA, Sen. Wyden, and Sen. Dorgan are completely missing the utility of such a market. The PAM will be a very useful hedge market for terrorism insurance. Right now, you can already "profit" from such tragedies as catastrophic weather
(with a weather derivative), economic downturn (with a simple Put or by selling short), sickness (with medical insurance) or death (with life insurance). This is not betting. This is hedging, and we all depend on it being available. The statements by these Senators is like saying that Life Insurance is an appalling waste of money because we are profiting on someone's death. Absurd.
But, the description DARPA uses for PAM is part of the problem. It is one thing to provide a useful hedge market, but it is quite another to claim that this will have predictive value. I guess if all of the traders were given access to the Intelligence reports, this might happen, but without knowledge, this is just going to be a place for Insurance companies to lay off some risk (which is a very good thing).
A better argument against PAM is whether the government should even be doing this. Most, if not all, other hedge markets are in the private sector.